Comparison Calculations

rob.moran

Hi there,

I'm looking to put some money away for 12 Months and am comparing a tax-incurring bond which pays 12% AER on maturity and a 12 Month ISA at 7% AER which obviously doesn't incur tac.

How can I work out which of these would be better overall? I guess its not simply a matter of taking the tax rate off of the 12%

Cheers,

Rob

Aegis

I'm curious as to where you've found any product that gives 12%AER on a lump sum...

For a higher rate taxpayer the accounts would be much the same, and it might be better to go for the ISA just to make sure that your allowance is used for the year. For anyone else, the short term gains would be better in the 12% account than in the 7% ISA, but I'd be very careful about the terms and conditions of such an account, as the only think I know of that's even close to 12% is the Halifax regular saver, which is a different story altogether.

rob.moran

The alliance and leicester premium regular saver pays 12%
http://www.allianceleicester.co.uk/savings/index.aspx?ct=primarynav

How can I knock up a quick sum to estimate the AER after tax?

Cheers,

Rob

Aegis

It'll be about 6.5% before tax after the year, so about 5.2% after basic rate tax.

Regular savers do not pay 12% AER on the full sum, which is why I advised you to be wary of the terms and conditions. If you have a lump sum to save, then the ISA will almost certainly be better in the long run and there will be a lot less hassle involved too!

rob.moran

Hi mate,

thanks for the reply.
Is the same to be said for 12 Month ISAs too? The 7% one Im looking at is from First Direct.
Some of these companies are really cheeky with small print. Is there anything obvious to look out for to indicate if an AER is Monthly or Yearly?

Cheers,

Rob

Aegis

That one's a regular saver too, so you are comparing like for like. However, if you were looking for a lump sum investment, then these products aren't suitable for you. These are best for people who have, say, a spare £200 a month to put away. If you have a couple of thousand, you'd be better off opening up a decent rate cash ISA and making the most of tax-free savings like that. You can still get at least 6.25% tax free on a lump sum up to £3600. I'm not sure if there are places beating that at the moment, but there's a very good thread in this area titled "best mini cash ISAs" or similar. It'll be able to tell you which ISAs currently have the best rates.

rob.moran

Thanks very much for your help!